Shock contraction in UK economy

January 25, 2011
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The UK economy contracted by a shock 0.5 per cent in the final three months of last year as December’s severe weather dealt a far heavier blow than experts had expected.

They had forecast that economic growth would continue but be slower – down from the 0.7 per cent achieved in the third quarter and 1.1 per cent in the second to 0.5 per cent.

This morning’s figures from the Office for National Statistics (ONS) figures are bad news for the Government as its public spending cuts have not yet started in earnest. They also present a challenge to the Bank of England, which had been expected to raise interest rates within the next few months to head off rising inflation.

Analysts pointed out that even when the impact of December’s snow is taken out, the economy would still have struggled to register any improvement.

Growth is expected to slow even further in the first half of this year as the recent hike in VAT combines with the impact of Government’s spending cuts and higher fuel costs.

But Chancellor George Osborne said the government would not change its austerity programme.

“These are obviously disappointing numbers, but the ONS has made it very clear that the fall in GDP was driven by the terrible weather in December,” he said in a statement.

“There is no question of changing a fiscal plan that has established international credibility on the back of one very cold month. That would plunge Britain back into a financial crisis. We will not be blown off course by bad weather.”

Today’s figures are a further blow the Government’s economic stewardship, coming a day after departing CBI boss Sir Richard Lambert accused it of failing to come up with policies that support economic growth.

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